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The Influence Of Organized Options Trading On Stock Price Behavior Following Large One‐Day Stock Price Declines

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  • David R. Peterson

Abstract

In this study I examine the effect of organized options trading on stock price behavior immediately following stock price declines of 10 percent or more. A matched‐pair sample of National Market System option and nonoption firms are analyzed from June 1985 through December 1992. After controlling for the bid‐ask bounce, firm size, share price, return standard deviation, and beta, I find that three‐day cumulative abnormal returns for option firms are approximately 1.57 percent less than those for nonoption firms. Thus, options trading enhances stock market efficiency and/or liquidity. However, no profitable trading strategies are indicated.

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  • David R. Peterson, 1995. "The Influence Of Organized Options Trading On Stock Price Behavior Following Large One‐Day Stock Price Declines," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 18(1), pages 33-44, March.
    • Handle: RePEc:bla:jfnres:v:18:y:1995:i:1:p:33-44
    DOI: 10.1111/j.1475-6803.1995.tb00209.x
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    Cited by:

    1. Wan, Jer-Yuh & Kao, Chung-Wei, 2009. "Evidence on the contrarian trading in foreign exchange markets," Economic Modelling, Elsevier, vol. 26(6), pages 1420-1431, November.
    2. Chune Young Chung & Doojin Ryu & Kainan Wang & Blerina Bela Zykaj, 2018. "Optionable Stocks and Mutual Fund Performance," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(3), pages 390-412, March.
    3. Amini, Shima & Gebka, Bartosz & Hudson, Robert & Keasey, Kevin, 2013. "A review of the international literature on the short term predictability of stock prices conditional on large prior price changes: Microstructure, behavioral and risk related explanations," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 1-17.
    4. Thuy Khang Huynh & Vijay Shenai, 2019. "Option Trading Volumes and Their Impact on Stock Prices at Earnings’ Announcements: A Study of S & P100 Stocks in the Post Crisis Era 2010-2017," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 9(3), pages 83-103, July.
    5. Parikakis, George S. & Syriopoulos, Theodore, 2008. "Contrarian strategy and overreaction in foreign exchange markets," Research in International Business and Finance, Elsevier, vol. 22(3), pages 319-324, September.

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